Hong Kong to allow third party arbitration funding from 1 February

A code of practice on third party arbitration funding (11-page / 1.1MB PDF) was issued on 7 December 2018, setting out the practices and standards third party funders will be expected to comply with when carrying on activities in connection with arbitration funding. To enable funding to take place, relevant parts of Hong Kong's Arbitration Ordinance have been amended and the amendments will come into force on 1 February 2019.

The amendments to the Arbitration Ordinance include the abolishment of the common law legal doctrines of 'maintenance and champerty', which prohibit third party funding of litigation in Hong Kong, in relation to arbitrations. The Amendment Ordinance was passed in June 2017, but the DoJ decided against enacting all of its provisions until an accompanying code of practice was developed. The 2017 Amendment Ordinance also contained provisions relating to third party funding of mediation. The DoJ is yet to bring these into force, and announced in December that it would defer doing so until "further deliberation on the way forward" had taken place.

The new code of practice requires third party funders, whether corporate entities or individuals, to ensure that their promotional materials are "clear and not misleading" and to "take reasonable steps to ensure that the funded party is made aware of the right to seek independent legal advice on the funding agreement before entering into it", among other responsibilities. The code also incorporates capital adequacy requirements; and requires the funder to effectively manage any conflicts of interest and submit annual returns to the advisory body.

International arbitration expert Nicholas Turner of Pinsent Masons, the law firm behind Out-Law.com, said that allowing third party funding of arbitrations would "bring Hong Kong into line with a number of other major arbitration jurisdictions, and ensure Hong Kong remains an important centre for international arbitration".

"In adopting a Code, Hong Kong has in essence followed the approach adopted in England and Singapore, almost," he said.

"The Hong Kong Code provides a prescriptive set of obligations which apply to a third party funder, with the aim of protecting funded parties. This is similar to the English Association of Litigation Funders' Code of Conduct and the Singapore Institute of Arbitrators guidelines. However, compliance with the Hong Kong Code will be overseen by an advisory body, whereas the English code is self-regulating. Despite this, a failure to comply with the Hong Kong code will not result in judicial or other proceedings."

"In anticipation of this change, we have seen and are going to see increased activity from funders. Funders will be financing disputes on a 'non-recourse' basis, meaning that the funder only receives a benefit if the arbitration is successful, so the funder takes the risk that the claim will not succeed. This means that funded parties will have a reduced financial risk. It follows that there is likely to be an increased number of funded arbitrations and more arbitrations being resolved in Hong Kong," he said.

"Third party funding will be allowed for both new and ongoing arbitrations once the Arbitration Ordinance amendments take effect," Turner said.

"For those wishing to seek funding, the process of determining viability will be rigorous," he said. "Understanding the factors taken into account by funders will be essential for a party seeking funding. For a counterparty facing a funded claim, it is equally important to understand the process and to ensure its case demonstrates clear merits."